Year-End Tax Planning

By December 10, 20202020, Money Moxie, Newsletter

Harvest losses now to help your next tax return
If you have investments that have gained money this year and others that have lost, you can sell some of both in order to reduce the tax liability when you do your taxes next year. This is known as tax-loss harvesting. You can consult with Smedley Financial and/or your accountant to see how to best maximize your tax situation.

Qualified Charitable Distributions
If you are over age 70 ½ and are charitably inclined, then you still have time to do a Qualified Charitable Distribution or QCD. This year you don’t have to take a Required Minimum Distribution (RMD), so many people are considering not doing their QCD as well. However, we are still concerned the tax rates may go up in the future, so we would like to get as much money out of IRAs as possible tax-free. If you are going to make charitable donations anyway, a QCD is still a great option.

Convert your IRA to a Roth IRA
You can reduce future tax liabilities and take advantage of the current favorable tax environment by converting all or a portion of your tax-deferred retirement account to a Roth IRA. The conversion must be completed before December 31st. You can also use this strategy to maximize a low tax-bracket. For example, if you are married filing jointly, and your taxable income is $30,000, you can increase your taxable income to $40,125 and remain in the 12% tax-bracket. To get the full value of the conversion, plan to pay the taxes on the conversion from another account, such as a savings account.

Donate appreciated stock
If you have appreciated stock in your portfolio, you can donate the stock to a charity and avoid paying tax on the gain. Even better, if you itemize your taxes, you can receive a deduction for the value of the stock on the day the donation is made. One catch: you must have owned the stock for over one year before making the donation. Then you can invest the cash you would have donated to make a future donation.

Bunching deductions
The number of tax filers using the standard deduction has increased over the last couple of years. This is because the standard deduction was increased to a level that exceeds most filers’ tax deductions. However, if you are close to the standard deduction, you might consider bunching deductible items into one tax year. For example, you can make charitable donations for two years at a time or push medical expenses into one year. Then you can itemize every other year.

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